Rising Precision Radiotherapy Demand Will Support Stronger Long Term Earnings Power

Catalysts

About Accuray

Accuray develops and manufactures advanced radiation therapy systems that enable precise, personalized treatment of cancer and other diseases.

What are the underlying business or industry changes driving this perspective?

• Global demand for precision and adaptive radiotherapy is increasing as cancer incidence rises and clinicians seek to reduce toxicity, supporting multi year growth in system placements and recurring service revenue.
• The launch of the Stellar platform and ongoing innovation in online adaptive radiotherapy position Accuray to participate in higher value segments of the radiation oncology market, which may influence average selling prices and product gross margins over time.
• Deepening clinical and academic collaborations, such as the memorandum of understanding with the University of Wisconsin, can support evidence generation and training that expand utilization, influencing procedure volumes and long term service revenue.
• Management’s transformation plan, including restructuring actions and cost optimization, is designed to affect adjusted EBITDA margins, with a focus on earnings power even in a modest top line growth environment.
• Growth of the installed base in developed and high growth international regions, combined with demonstrated pricing power on service contracts, supports a more predictable, higher margin recurring revenue mix that can affect cash flow stability and net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Accuray's revenue will grow by 4.2% annually over the next 3 years.
• Analysts are not forecasting that Accuray will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Accuray's profit margin will increase from -4.3% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Accuray's profit margin were to converge on the industry average, you could expect earnings to reach $65.9 million (and earnings per share of $0.47) by about December 2028, up from $-19.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, up from -5.8x today. This future PE is lower than the current PE for the US Medical Equipment industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged slowdown in capital equipment purchasing in key regions such as EIMEA and China, whether due to geopolitical or macroeconomic pressures, could keep product revenue below expectations and limit overall top line growth.
• Sustained pressure from tariffs and unfavorable geographic and product mix, particularly a higher proportion of lower margin emerging market deals, could constrain gross margins and delay the path to sustainable profitability and stronger net margins.
• If the transformation and restructuring plan fails to deliver the anticipated cost savings and operational efficiencies, higher operating expenses and restructuring charges could continue to weigh on adjusted EBITDA and earnings.
• Execution risk in converting the large order backlog into installations, especially given long sales cycles and regional timing issues, could result in revenue being pushed out or lost altogether, undermining cash flow and earnings visibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $3.88 for Accuray based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $510.1 million, earnings will come to $65.9 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of $0.99, the analyst price target of $3.88 is 74.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.